Leaky business short-changes investors

SOME call it 'low-hanging fruit', others 'insider trading'. This doesn't refer to buying shares before a bid. After all, there's precious little mergers and acquisitions activity around. Rather it refers to shorting shares ahead of a big placing of stock.

Such placings have become a feature of Europe's capital markets recently, typically as companies try to cut their debt by selling their shares or minority stakes held in other companies.

These share sales used to be kept secret until the morning of the transaction. However, in recent months, rumours of placings have begun to circulate before they have been announced. Those in receipt of such rumours - typically hedge funds - short the stock and drive it down, hoping to make a profit by covering their positions cheaply in the placing.

Take last month's £1.7bn placing of BSkyB stock by Vivendi. News of it seeped out the previous day, leading to an exceptionally large 33m shares being traded. BSkyB stock was driven sharply down, with the result that Vivendi's stake was placed at 670p a share. Two days later it had rebounded to 740p.

Pinpointing how rumours circulate is tricky. Sometimes it is obvious that a stake like the BSkyB one is coming on the market, even if the exact timing is unclear. At other times, the vendor talks to several banks before appointing one to handle the sale. At yet others, the bank takes soundings from a select group of hedge fund clients before launching the sale. Although banks and hedge funds are supposed to keep such information confidential, it has a habit of leaking out. This murky business should be cleaned up.

Banks job cuts squeeze specialists

FOR a brief moment last week, the harsh sound of axes grinding at City investment banks drowned out the cheering of football fans. UBS Warburg handed out P45s to some 200 of its bankers, only a week after WestLB gutted its equities business. Deutsche Bank and Citigroup are expected to be next in line.

Though harsh, this is a rational reaction to the trickling flow of mergers, reluctance of the flotations market to bubble back and the downward direction of global equity indices.

The industry has already had two cost-cutting exercises in as many years. The distinguishing feature of this one, however, is the acceptance that business is just not going to pick up. Moreover, the fixed-income leg that supported the industry as rates were steadily cut by central banks across the globe last year is no longer so strong.

All this is putting intense pressure on the model embraced by corporate finance departments in the late 1990s towards sector specialisation.

UBS Warburg brass is now assessing the relevance of divvying up the dwindling business among specialist teams. Deutsche Bank is expected to get rid of its specialist technology, media and telecoms bankers and fold those still in jobs into a generalist corporate finance pool.

Clients no longer need to speak to the expert on Scandinavian widgets to hear how their business is evolving. They need bankers with creative solutions to their financial problems. As the third round of cuts unfolds, don't be surprised to see the return of the generalist to the City.

Boredom beats sex

WHEN sexy loses you money, why not buy boring? That is the message of the next reshuffle of FTSE 100 stocks, which takes place on Tuesday.

Out will go almost all the remaining go-go tech stocks - Arm Holdings, Logica and Electrocomponents. In are likely to come Bunzl, Johnson Matthey and Xstrata. None of these three could be described as sexy. But the least sexy of them is Bunzl. Johnson Matthey is, at least, involved in platinum. And Xstrata, the mining group, had a flash debut on the market earlier this year.

As for Bunzl, it merely distributes paper cups, plastic wrappings and the like to caterers and supermarkets. That may sound mundane, but Bunzl does what it does really well. And in this market, that is what counts.

Hugo Dixon is Editor of www.breakingviews.com